October 3, 2011 – The $600 Trillion Dollar Elephant in the Room: The combined futures market is over $600T! The entire Gross Domestic Product (GDP) for the U.S. is about $15T, for the entire year. That means the futures market is 40 times bigger that the annual U.S. GDP!
The 22 high volume futures, I have listed above, is just the tip of the iceberg. The value of just one high volume futures contract, from the above list, is 10 times bigger than all the stocks traded on the New York Stock Exchange (NYSE). And I’m talking about just one days worth of trading.
Here is a quick lesson in commodities (futures contracts). They are called contracts because that is exactly what they are. For example, when I enter into a trade in wheat, I am signing a contract stating that I will make or take delivery of 5,000 bushels of wheat (about a railroad cars worth) at a stated price and at a given date in the future (that’s why they’re called futures). Continuing with the wheat example, producers (farmers) want to sell their wheat; while users (bread makers) need the product. As a speculator, I don’t want the wheat. I am merely wagering on the price change of wheat over a time frame from a few minutes to to few months. Speculators provide the volume in futures contracts, so that the producers and users can easily enter and exit the market. The chart above, shows that wheat closed at $6.09 and 3/4’s cents per bushel on September 30, 2011. Therefore, the value of one contract is $304,875 each ($6.0975 times 5,000 bushels). Multiply that by the thousands of wheat contracts traded per day, and I think you’re beginning to understand the size of these markets.
Buyers make and users take delivery of product, but only if they want to. As a speculator, I don’t want the product. However, even if you do take delivery (as a buyer) you DO NOT get it dumped on your front lawn. All you get is a warehouse receipt for 5,000 bushels of wheat. The wheat is stored in Chicago, or at one of the many authorized storage sites as sanctioned by the Chicago Board of Trade (CBOT).
Most of the $600T “elephant” is in the SWAPS market, which are complex bets on interest rate changes that banks and other financial institutions use to hedge (insure) interest rate changes. The lurking potential disaster is that a sudden change in interest rates would bring economic Armageddon to the world’s interconnected financial systems.
The Master of Disaster